国际经济学英文课件：ch13 Exchange Rates and the Foreign Exchange Market An Asset Approach

1、Slides prepared by Thomas BishopCopyright 2009 Pearson Addison-Wesley. All rights reserved.Chapter 13Exchange Rates and the Foreign Exchange Market: An Asset ApproachCopyright 2009 Pearson Addison-Wesley. All rights reserved.13-2Preview The basics of exchange rates Exchange rates and the prices of g

2、oods The foreign exchange markets The demand of currency and other assets A model of foreign exchange marketsrole of interest rates on currency depositsrole of expectations of exchange ratesCopyright 2009 Pearson Addison-Wesley. All rights reserved.13-3Definitions of Exchange Rates Exchange rates ar

3、e quoted as foreign currency per unit of domestic currency or domestic currency per unit of foreign currency. How much can be exchanged for one dollar? 102/$1 How much can be exchanged for one yen? $0.0098/1 Exchange rates allow us to denominate the cost or price of a good or service in a common cur

4、rency. How much does a Honda cost? 3,000,000 Or, 3,000,000 x $0.0098/1 = $29,400Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-4Table 13-1: Exchange Rate QuotationsCopyright 2009 Pearson Addison-Wesley. All rights reserved.13-5Depreciation and Appreciation Depreciation is a decrease i

5、n the value of a currency relative to another currency. A depreciated currency is less valuable (less expensive) and therefore can be exchanged for (can buy) a smaller amount of foreign currency.$1/1 $1.20/1 means that the dollar has depreciated relative to the euro. It now takes $1.20 to buy one eu

6、ro, so that the dollar is less valuable.The euro has appreciated relative to the dollar: it is now more valuable.Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-6Depreciation and Appreciation (cont.) Appreciation is an increase in the value of a currency relative to another currency. A

7、n appreciated currency is more valuable (more expensive) and therefore can be exchanged for (can buy) a larger amount of foreign currency.$1/1 $0.90/1 means that the dollar has appreciated relative to the euro. It now takes only $0.90 to buy one euro, so that the dollar is more valuable.The euro has

8、 depreciated relative to the dollar: it is now less valuable.Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-7Depreciation and Appreciation (cont.) A depreciated currency is less valuable, and therefore it can buy fewer foreign produced goods that are denominated in foreign currency. H

9、ow much does a Honda cost? 3,000,000 3,000,000 x $0.0098/1 = $29,400 3,000,000 x $0.0100/1 = $30,000 A depreciated currency means that imports are more expensive and domestically produced goods and exports are less expensive. A depreciated currency lowers the price of exports relative to the price o

10、f imports.Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-8Depreciation and Appreciation (cont.) An appreciated currency is more valuable, and therefore it can buy more foreign produced goods that are denominated in foreign currency. How much does a Honda cost? 3,000,000 3,000,000 x $0

11、.0098/1 = $29,400 3,000,000 x $0.0090/1 = $27,000 An appreciated currency means that imports are less expensive and domestically produced goods and exports are more expensive. An appreciated currency raises the price of exports relative to the price of imports.Copyright 2009 Pearson Addison-Wesley.

12、All rights reserved.13-9Foreign Exchange Markets The set of markets where foreign currencies and other assets are exchanged for domestic onesInstitutions buy and sell deposits of currencies or other assets for investment purposes. The daily volume of foreign exchange transactions was $1.9 trillion i

13、n 2004.About 90% of transactions involved US dollars.Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-10Foreign Exchange MarketsThe participants:1.Commercial banks and other depository institutions: transactions involve buying/selling of deposits in different currencies for investment p

14、urposes.2.Non-bank financial institutions (mutual funds, hedge funds, securities firms, insurance companies, pension funds) may buy/sell foreign assets for investment.3.Non-financial businesses conduct foreign currency transactions to buy/sell goods, services and assets.4.Central banks: conduct offi

15、cial international reserves transactions.Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-11Foreign Exchange Markets (cont.) Buying and selling in the foreign exchange market are dominated by commercial and investment banks.Inter-bank transactions of deposits in foreign currencies occur

16、 in amounts $1 million or more per transaction.Central banks sometimes intervene, but the direct effects of their transactions are small and transitory in many countries.Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-12Foreign Exchange Markets (cont.) Computer and telecommunications t

17、echnology transmit information rapidly and have integrated markets. The integration of markets implies that there is no significant arbitrage between markets.Arbitrage: buying at a low price and selling at a high price for a profit. If dollars are cheaper in New York than in Hong Kong, what do you p

18、redict will happen? When other factors are the same, people will buy assets in New York and stop buying them in Hong Kong, so that their price in New York rises and their price in Hong Kong falls, until they are equal in the two markets.Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-1

19、3Spot Rates and Forward Rates Spot rates are exchange rates for currency exchanges “on the spot”, or when trading is executed in the present. Forward rates are exchange rates for currency exchanges that will occur at a future (“forward”) date.Forward dates are typically 30, 90, 180, or 360 days in t

20、he future.Rates are negotiated between two parties in the present, but the exchange occurs in the future.Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-14Fig. 13-1: Dollar/Pound Spot and Forward Exchange Rates, 19812007 Source: Datastream. Rates shown are 90-day forward exchange rates

21、 and spot exchange rates, at end of month.Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-15Other Methods of Currency Exchange Foreign exchange swaps: a combination of a spot sale with a forward repurchase. Swaps often result in lower fees or transactions costs because they combine two

22、 transactions, and they allow parties to meet each others needs for a temporary amount of time. Futures contracts: a contract designed by a third party for a standard amount of foreign currency delivered/received on a standard date. Contracts can be bought and sold in markets, and only the current o

23、wner is obliged to fulfill the contract.Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-16Other Methods of Currency Exchange Options contracts: a contract designed by a third party for a standard amount of foreign currency delivered/received on or before a standard date. Contracts can

24、be bought and sold in markets.A contract gives the owner the option, but not obligation, of buying or selling currency if the need arises.Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-17The Demand of Currency Deposits What influences the demand of (willingness to buy) deposits denomi

25、nated in domestic or foreign currency? Factors that influence the return on assets determine the demand of those assets.Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-18The Demand of Currency Deposits (cont.) Rate of return: the percentage change in value that an asset offers during a

26、 time period. The annual return for $100 savings deposit with an interest rate of 2% is $100 x 1.02 = $102, so that the rate of return = ($102 - $100)/$100 = 2% Real rate of return: inflation-adjusted rate of return, which represents the additional amount of goods & services that can be purchase

27、d with earnings from the asset. The real rate of return for the above savings deposit when inflation is 1.5% is: 2% 1.5% = 0.5%. After accounting for the rise in the prices of goods and services, the asset can purchase 0.5% more goods and services after 1 year.Copyright 2009 Pearson Addison-Wesley.

28、All rights reserved.13-19The Demand of Currency Deposits (cont.) If prices are fixed, the inflation rate is 0% and (nominal) rates of return = real rates of return. Because trading of deposits in different currencies occurs on a daily basis, we often assume that prices do not change from day to day.

29、A good assumption to make for the short run.Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-20The Demand of Currency Deposits (cont.) Risk of holding assets also influences decisions about whether to buy them. Liquidity of an asset, or ease of using the asset to buy goods and services,

30、 also influences the willingness to buy assets. But we assume that risk and liquidity of currency deposits in foreign exchange markets are essentially the same, regardless of their currency denomination. Risk and liquidity are only of secondary importance when deciding to buy or sell currency deposi

31、ts. Importers and exporters may be concerned about risk and liquidity, but they make up a small fraction of the market.Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-21The Demand of Currency Deposits (cont.) We therefore say that investors are primarily concerned about the rates of re

32、turn on currency deposits. Rates of return that investors expect to earn are determined by interest rates that the assets will earnexpectations about appreciation or depreciationCopyright 2009 Pearson Addison-Wesley. All rights reserved.13-22The Demand of Currency Deposits (cont.) A currency deposit

33、s interest rate is the amount of a currency that an individual or institution can earn by lending a unit of the currency for a year. The rate of return for a deposit in domestic currency is the interest rate that the deposit earns. To compare the rate of return on a deposit in domestic currency with

34、 one in foreign currency, consider the interest rate for the foreign currency deposit the expected rate of appreciation or depreciation of the foreign currency relative to the domestic currency.Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-23The Demand of Currency Deposits (cont.) Su

35、ppose the interest rate on a dollar deposit is 2%. Suppose the interest rate on a euro deposit is 4%. Does a euro deposit yield a higher expected rate of return? Suppose today the exchange rate is $1/1, and the expected rate one year in the future is $0.97/1. $100 can be exchanged today for 100. The

36、se 100 will yield 104 after one year. These 104 are expected to be worth $0.97/1 x 104 = $100.88 in one year.Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-24The Demand of Currency Deposits (cont.) The rate of return in terms of dollars from investing in euro deposits is ($100.88-$100

37、)/$100 = 0.88%. Lets compare this rate of return with the rate of return from a dollar deposit. The rate of return is simply the interest rate. After 1 year the $100 is expected to yield $102: ($102-$100)/$100 = 2% The euro deposit has a lower expected rate of return: thus, all investors should be w

38、illing to dollar deposits and none should be willing to hold euro deposits.Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-25The Demand of Currency Deposits (cont.) Note that the expected rate of appreciation of the euro was ($0.97- $1)/$1 = -0.03 = -3%. We simplify the analysis by say

39、ing that the dollar rate of return on euro deposits approximately equals the interest rate on euro deposits plus the expected rate of appreciation of euro deposits 4% + -3% = 1% 0.88%R + (Ee$/ - E$/)/E$/ Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-26The Demand of Currency Deposits

40、(cont.) The difference in the rate of return on dollar deposits and euro deposits is R$ - (R + (Ee$/ - E$/)/E$/ ) =R$ - R - (Ee$/ - E$/)/E$/ expected rate of return = interest rate on dollar depositsinterest rateon euro depositsexpected rate of return on euro depositsexpected exchange ratecurrentexc

41、hange rateexpected rate of appreciation of the euroCopyright 2009 Pearson Addison-Wesley. All rights reserved.13-27Table 13-3: Comparing Dollar Rates of Return on Dollar and Euro DepositsCopyright 2009 Pearson Addison-Wesley. All rights reserved.13-28Model of Foreign Exchange Markets We use the dema

42、nd of (rate of return on) dollar denominated deposits and the demand of (rate of return on) foreign currency denominated deposits to construct a model of foreign exchange markets. This model is in equilibrium when deposits of all currencies offer the same expected rate of return: interest parity. In

43、terest parity implies that deposits in all currencies are equally desirable assets. Interest parity implies that arbitrage in the foreign exchange market is not possible.Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-29Model of Foreign Exchange Markets (cont.) Interest parity says:R$

44、= R + (Ee$/ - E$/)/E$/ Why should this condition hold? Suppose it didnt. Suppose R$ R + (Ee$/ - E$/)/E$/ Then no investor would want to hold euro deposits, driving down the demand and price of euros. Then all investors would want to hold dollar deposits, driving up the demand and price of dollars. T

45、he dollar would appreciate and the euro would depreciate, increasing the right side until equality was achieved:R$ R + (Ee$/ - E$/)/E$/ Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-30Model of Foreign Exchange Markets (cont.) How do changes in the current exchange rate affect the exp

46、ected rate of return of foreign currency deposits?Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-31Model of Foreign Exchange Markets (cont.) Depreciation of the domestic currency today lowers the expected rate of return on foreign currency deposits. Why? When the domestic currency dep

47、reciates, the initial cost of investing in foreign currency deposits increases, thereby lowering the expected rate of return of foreign currency deposits. Appreciation of the domestic currency today raises the expected return of deposits on foreign currency deposits. Why? When the domestic currency

48、appreciates, the initial cost of investing in foreign currency deposits decreases, thereby lowering the expected rate of return of foreign currency deposits.Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-32Table 13-4: Todays Dollar/Euro Exchange Rate and the Expected Dollar Return on

49、Euro Deposits When Ee$/ = $1.05 per Euro Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-33Fig. 13-3: The Relation Between the Current Dollar/Euro Exchange Rate and the Expected Dollar Return on Euro DepositsCopyright 2009 Pearson Addison-Wesley. All rights reserved.13-34The Current Ex

50、change Rate and the Expected Rate of Return on Dollar DepositsExpected dollar return on dollar deposits, R$ Current exchange rate, E$/1.021.031.051.070.0310.0500.0690.0790.1001.00R$ Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-35Fig. 13-4: Determination of the Equilibrium Dollar/Eur

51、o Exchange RateNo one is willing to hold euro depositsNo one is willing to hold dollar deposits Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-36Model of Foreign Exchange Markets The effects of changing interest rates: an increase in the interest rate paid on deposits denominated in a

52、 particular currency will increase the rate of return on those deposits. This leads to an appreciation of the currency.Higher interest rates on dollar-denominated assets causes the dollar to appreciate.Higher interest rates on euro-denominated assets causes the dollar to depreciate.Copyright 2009 Pe

53、arson Addison-Wesley. All rights reserved.13-37Fig. 13-5: Effect of a Rise in the Dollar Interest RateA depreciationof the euro isan appreciationof the dollar.Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-38Fig. 13-6: Effect of a Rise in the Euro Interest RateCopyright 2009 Pearson A

54、ddison-Wesley. All rights reserved.13-39The Effect of an Expected Appreciation of the EuroIndividuals and institutions now expect the euro to appreciateCopyright 2009 Pearson Addison-Wesley. All rights reserved.13-40The Effect of an Expected Appreciation of the Euro If people expect the euro to appr

55、eciate in the future, then euro-denominated assets will pay in valuable euros, so that these future euros will be able to buy many dollars and many dollar-denominated goods.The expected rate of return on euros therefore increases.An expected appreciation of a currency leads to an actual appreciation

56、 (a self-fulfilling prophecy).An expected depreciation of a currency leads to an actual depreciation (a self-fulfilling prophecy).Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-41Covered Interest Parity Covered interest parity relates interest rates across countries and the rate of ch

57、ange between forward exchange rates and the spot exchange rate:R$ = R + (F$/ - E$/)/E$/ where F$/ is the forward exchange rate. It says that rates of return on dollar deposits and “covered” foreign currency deposits are the same. How could you earn a risk-free return in the foreign exchange markets

58、if covered interest parity did not hold? Covered positions using the forward rate involve little risk.Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-42Summary1. Exchange rates are prices of foreign currencies in terms of domestic currencies, or vice versa. Copyright 2009 Pearson Addison-Wesley. All rights reserved.13-43Summary2.Depreciation of a countrys currency means that it is less expensive (valuable) and goods denominated in it are less expensive: exports are cheaper and imports more expensive.A depreciation wil